Key message: despite facing an extremely challenging macro backdrop, we think Sirius is holding up in respectable shape operationally. Even under more conservative valuation assumptions and earnings growth forecasts, we think there is clear value in the counter at the current price (7.4% dividend yield, 28% discount to forward NAV).   

  • 1H FY23 performance meeting expectations, despite difficult macro conditions: Germany portfolio lfl annualised rent roll grew +2.4% over the six-month period to EUR115.2mn (1H FY22: +2.5%), driven by a +3.3% lfl increase in the average rental rate per sqm (1H FY22: +2.6%). Lfl rent roll grew +4.1% in the UK (BizSpace portfolio), with +8.4% lfl growth in average rental rate per sqm. 12-month rolling cash collection rate is 98.0% in Germany (1H FY22: 98.2%) and 99.3% in the UK. Overall occupancy declined from 85.3% at FY22 to 84.4% at 1H FY23, although this was expected, and management highlights the opportunity for improved letting of space in 2H FY23. Sirius secured fixed rate agreements for its supply of gas to customers in 2020, which expire in Dec-23; in Sep-22, the German government announced a relief package worth up to EUR200bn to assist citizens and businesses with high energy prices, which will materially mitigate risk to the German industrial property market.
  • No deterioration of balance sheet: the portfolio was last valued in Mar-22 at a 6.9% gross yield in Germany, but management expects further positive growth for FY23 as valuation yields have been conservative relative to comparable assets in the market (providing a cushion to yield shifts), and underlying cash flow growth should offset any cap rate increases. Management has also guided for a deliberately slower pace of acquisitive growth under current market conditions (EUR44.6mn of acquisitions were concluded in the period across three sites in Germany), with three disposals at a collective 32% premium to book value raising EUR33.6mn. Net LTV at FY22 was 41.6%; in the absence of an equity raise, we expect to see heightened focus on capital recycling in the near-term.
  • Managing the cost of debt: in advance of the next major debt expiry (EUR170mn with BerlinHyp AG due in Oct-23), Sirius has refinanced the facility for a new 7-year facility commencing Nov-23 with a fixed interest rate of 4.3%. This facility extends Sirius’ weighted average debt expiry to 5.0 years from 3.8 years and will increase the weighted average cost of debt from 1.4% to 1.9%. The next priority is to refinance EUR94mn of debt maturing within the next two years; if refinanced at an interest rate of 4.5%, overall WACD for Sirius will move to c. 2.3%.
  • Update to earnings forecasts and target price: our revised FY23E FFO per share estimate is EUR8.17 (+20.3% y/y). We maintain dividend payout at 65% of FFO through our forecast period, despite the capacity to raise it to 70-75% on the back of strong operational cash flows.
  • Our revised target price is ZAR18.22, which implies a forecast one-year TSR of +44.2% (7.4% dividend yield, +36.8% capital return). While we remain concerned with the macro picture that provides the backdrop to Sirius’ portfolio in Germany and especially the UK, we find the share price materially undervalues Sirius’ prospects and ability to generate strong total returns relative to peers.

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